The Question
My husband and I are looking at helping our daughter onto the property ladder using a Joint Borrower, Sole Proprietor mortgage. Our daughter would like to buy her first home with her partner, and they have been together for two years.
We are a little concerned about what might happen to our money and credit rating if, for example, her partner defaulted or if they split up.
We obviously want to help our daughter and her partner, but equally we also want to make sure we go into this with our eyes open and are prepared for any potential problems.
Andrew’s Answer
With private client law, we normally consider five different life events and how they may affect people moving forward – death, loss of mental capacity, marriage/divorce, a breakdown in relationships and financial problems – our ‘five sources of doom’.
Whenever there is financial interaction between people, it is always helpful to hold these five different events in mind and understand the risks associated with them as well as the potential to mitigate this.
Death
In this case either of you, your daughter or her partner. If something were to happen to you, it may trigger a need to repay the mortgage (the security having gone).
If your daughter or her partner were to die then there may also be a need to repay the mortgage and any sale of the property could be delayed by the probate process. In this case, mitigation may come in the form of sufficient life-insurance paid into a trust.
This may be an appropriate way forward. In addition, your daughter and her partner should consider their position and seek estate planning advice. Where a couple have lived together in a relationship for two or more years (or where they are financially dependent upon each other) then there may be a claim by the survivor in the event of a death.
Whilst they are unmarried, a cohabitation or ‘living together’ agreement may help to mitigate some of this risk.
Loss of capacity
If either your daughter or her partner were unable to work and service the mortgage, the liability would befall you and you are concerned about the impact this may have on your credit rating if there are any difficulties.
Once again, insurance (critical illness and/or income protection insurance) may offer some relief here.
Marriage/divorce
If your daughter and her partner married and then divorced, they may have claims on each other’s assets. This may not have too much implication on your security on the mortgage unless it wasn’t being paid but is harder to protect against. Your daughter may be advised to consider a pre-nuptial agreement.
Breakdown in relationships
This is not necessarily just between your daughter and her partner but also with you. If your daughter and her partner split up then you are entirely right to be concerned about any shortfall in the mortgage payments.
Hopefully they will buy the property with a good declaration of trust setting out their respective interests and obligations as regards the mortgage so a shortfall will be recovered but life may be difficult in the meantime.
It may also be very hard to mitigate against this. Similarly, if your relationship with your daughter broke down, she may default on the mortgage ‘out of spite’ and it would not necessarily be quick for you to extradite yourselves from that situation.
Financial problems
Much of the above in terms of non-payment of the mortgage is similar but it would be worth your daughter understanding that her partner’s interest in the property would be there to satisfy his debts in the event of a problem and emphasises the need for them to take proper advice on the purchase and the risks as between them. In the event of a loss of a job, income protection insurance may help.
Whilst you cannot guard against everything going wrong, it is best to understand all of the risks and either apply mitigation where possible (in the knowledge that you may not be able to control everything) or accept the risks.
Ultimately, you must decide whether it is a position that you should be in and if the mitigation is sufficient to protect you.
Andrew Titmus is partner, head of estate planning department and private client solicitor at Parfitt Cresswell
